No Surprise. OPEC Rivals Won’t Agree on Production Freeze

November Crude Oil futures broke sharply lower on Friday, but still managed to finish higher for the week. The catalyst behind the market’s 3.73% decline was a report that Saudi Arabia did not expect an agreement at talks next week among OPEC and non-OPEC crude exporters aimed at freezing production.

Selling pressure hit the crude oil market after Bloomberg reported that Saudi Arabia did not expect a decision at Algiers, the capital of Algeria where the major crude exporters are expected to convene next week for talks, traders said. Bloomberg cited a “delegate” as the source of the story, said traders who saw the report.

Earlier in the session, the market was actually trading higher on a Reuters report that Saudi Arabia has offered to reduce production if rival Iran caps its own output this year. Reuters based its report on sources who were familiar with discussions between the two sides.

What we can conclude from the wild price action on Friday is that Reuters has the bullish sources and Bloomberg has the bearish sources. No, we can’t reach that conclusion, but it sure looks suspicious.

What the price action does tell us, however, is that the bulls are more skeptical about anything getting accomplished at the informal meeting in Algiers. And that the bearish traders are more confident that a deal won’t be made.

Although there was a huge reaction to the downside from the news, it shouldn’t have been a surprise because investors haven’t really bought into the idea that a deal could be reached anyway since the November WTI futures market topped out at $50.00 on August 19.

At that time, in my opinion, traders decided that even if OPEC strikes a deal with Russia and other major producers in Algiers to freeze oil production, success will mean a lot less than when they tried and failed to make a similar deal five months ago.

I base my opinion on the fact that Saudi Arabia and Iran, whose political rivalry put an end to the previous negotiations, are together pumping about 1 million barrels a day more than at the start of the year, which may be the proposed level of the freeze.

That additional crude has prolonged a global oversupply in which at times looks as if inventory is taking one-step forward and two-steps back. As long as the two countries continue to produce at current levels and demand stays level, traders shouldn’t even expect the market to slide into a deficit until next year.

I have to conclude that even with a deal, the extra oil OPEC is pumping means it would be less effective than the Doha proposal from back in April. The ability to reach an agreement may have some “psychological” benefits, but the Saudi’s are going to reap “financial” benefits whether they make the deal or not.

I don’t believe there is any way Saudi Arabia, Iran, Libya, Nigeria and Russia – all of which have been or are planning to increase production, want to see a production cut or production freeze at this time anyway.